“Reliance Damages” is the term used when a party who expends money in reliance upon a contractual promise by another to do something may recover damages if the promise is not fulfilled.
Reliance Damages – Wasted Money
In other words – “wasted money”.
Reliance damages are compensation for loss of contractual benefits, allowed on the basis that expenditure less benefits received may be regarded as equivalent to the minimum net contractual benefits that the innocent party would have received had the contractual promise been performed, subject to the defendant proving that the expenditure would not have been recouped.
In other words, net wasted expenditure serves as a proxy for the minimum contractual benefits that the innocent party would have derived, except to the extent that the defendant shows that it would not have been recouped.
Caselaw – Facts
In the recent decision of 123 259 932 Pty Ltd v Cessnock City Council  NSWCA 21, the respondent (“the Council”) agreed to grant to the appellant (“Cutty Sark”) a lease of a part of Cessnock Airport (“the airport”), on which Cutty Sark was constructing an aircraft hangar from where it intended to operate a business conducting joy flights and advanced flight aerobatic training.
The relevant land was to become one lot of a proposed 25-lot subdivision, and the proposed lease would be for a term of thirty years from the registration of the plan of subdivision.
The Council – which was not only the applicant but also the relevant consent authority for approval of the subdivision – also promised to take all reasonable action to apply for and register the subdivision plan by 30 September 2011 (“Sunset Date”), and in the meantime granted Cutty Sark a licence of proposed Lot 104.
The Council repudiated that obligation, notifying Cutty Sark that it would not commit the funding required to proceed, with the consequence that the Plan was not registered by the Sunset Date, or at all, and the proposed lease was not granted.
Monies expended in reliance on the promise
In the meantime, Cutty Sark had proceeded to construct the hangar, at a cost in excess of $3 million. Cutty Sark was later deregistered and as a result, the Council terminated the Agreement and purchased the hangar for $1, as contemplated by the Agreement, making a significant windfall.
Cutty Sark was reinstated and commenced proceedings claiming damages for breach of contract by the Council. The primary judge held that the Council had breached the Agreement by failing to take all reasonable action to apply for and obtain registration of the Plan, but that Cutty Sark was entitled only to nominal damages in the sum of $1.
Cutty Sark appealed, contending that it should have been awarded substantial reliance damages, representing the amount that it had expended in constructing the hangar.
The Appeal was allowed and Cutty Sark recovered a judgment of $3,697,234.41 and interest;
In allowing the Appeal and ordering damages, the Court considered the basis upon which reliance damages can be made.
As to the formulation of the presumption:
- A plaintiff who is unable or does not undertake to demonstrate whether or to what extent the performance of a contract would have resulted in a profit may claim its wasted expenditure. In such a case, expenditure incurred by a plaintiff in reliance on a contractual promise made by the defendant and “wasted” because of non-performance by the defendant is recoverable, except to the extent that the defendant shows that the plaintiff would not have recouped its expenditure had the contract been performed.
- Relevant expenditure is not confined to expenditure under or required by the contract but extends (subject to the rule in Hadley v Baxendale (1854) 9 Exch 341) to any detrimental change of position by the promisee in reliance upon the defendant’s promise. The value of the reliance interest is the quantum of the net detriment. Such expenditure is regarded as “wasted” if the promise in reliance on which it was made is not performed, except to the extent that it is shown that the plaintiff has received some offsetting benefit, whether under or dehors the contract. It suffices to enliven the presumption that expenditure has been incurred in reliance on a defendant’s contractual promise which the defendant has failed to perform.
- It is not a precondition to the presumption arising that the plaintiff first establishes that it is “impossible” to prove expectation damages, let alone that it be impossible to prove that it would not have recouped its expenditure.
As to whether the contract excluded the Council’s liability for reliance damages:
- The provision in the Agreement excluding or releasing the Council from liability does not preclude Cutty Sark’s claim for reliance damages. The provision has no direct application. A generic reference to “commercial risk” obscures that the Agreement delineates between risks that Cutty Sark accepted and risks that it did not accept. Cutty Sark did not accept the risk that eventuated – that the Council repudiated its obligations to take all reasonable steps to procure registration of the Plan.
As to the impact of the Council having no obligation to develop the airport:
- The claim for reliance damages does not proceed on the basis that the Council was contractually obliged to implement the commercial development of the airport but on expenditure incurred in reliance on the Council performing the obligation of taking all reasonable action to procure the registration of the Plan. The fact that the Council did not promise to develop the airport does not mean that Cutty Sark did not incur expenditure on the construction of the hangar in reliance on the Council’s promise to take all reasonable steps to procure the registration of the plan.
Conclusion: the presumption arose
- In the present case, the presumption arose; Cutty Sark proved that it had incurred expenditure in reliance on the Council’s performance of its obligation to take all reasonable steps to procure the registration of the Plan.
Whether the presumption was rebutted
As to Council’s obligation not extending to developing the airport
- The fact that there was no promise to develop the airport does not mean that the potentiality of its development is irrelevant when considering whether the Council had discharged its onus of rebutting the presumption, by showing that Cutty Sark would not recoup its expenditure. In considering whether a plaintiff has been shown to be unable to recoup its expenditure, a court is not confined to the contractual entitlements of the plaintiff; it is permissible to have regard also to potential benefits that might have accrued to the plaintiff, although they are not contractual entitlements, if they may reasonably be supposed to have been in the contemplation of the parties.
As to Cutty Sark’s businesses having been unsuccessful
- Losses in the early stages of the businesses and their discontinuation prior to the Sunset Date do not significantly inform the prospects of resuming operations and recouping expenditure over the ensuing period of 30 years in the different circumstances that would or might have prevailed had the Plan been registered and the Lease granted, particularly given that with a subdivision there was a prospect of surrounding commercial development and a more conducive commercial environment.
As to Cutty Sark’s rejection of an alternative offer
- Cutty Sark as the innocent party was entitled to insist on its contractual rights, or damages for breach, rather than accepting some inferior proposal advanced by the Council. The rejection provides no reasonable basis for an inference that Cutty Sark would not have resumed operations and ultimately recouped its expenditure, had it been granted the proposed lease.
Conclusion: the presumption is not rebutted
- It is impossible to be satisfied that by the end of the proposed lease term, Cutty Sark would not have recouped its expenditure. In circumstances where what would have transpired had the Council performed its obligations was speculative, but there was a high degree of likelihood (given that Council was also the consent authority) that the Plan would be registered, and at least a prospect of further development of the airport producing a more conducive commercial environment for Cutty Sark’s business operations, if not immediately then sometime over the ensuing thirty years of the lease to which Cutty Sark was entitled, the Council could not and did not show that Cutty Sark would not over a 30-year lease have recouped its expenditure.
Whether recovery was precluded by the remoteness of damages
- It was, or ought to have been, plain to both parties, had they turned their minds to the question when the contract was made, that non-performance by the Council of its relevant obligation would result in Cutty Sark wasting the expenditure it had incurred and be going to incur in constructing the hangar. The loss incurred is therefore reasonable to be supposed to have been in the contemplation of both parties when the contract was made. The damages fall within the second limb of Hadley v Baxendale (1854) 9 Exch 341. The matters relied on by the primary judge – that the parties contemplated that no lease might be granted without breach, that the hangar would eventually be transferred to the Council for nominal consideration, and that whether and when the Plan would be registered was uncertain – were not inconsistent with that conclusion.
Any party contemplating a breach of a promise to do something in commercial dealings needs to be wary of and seek legal advice about the potential for a damages claim against them where the other party has spent money in reliance upon the promise Where the risk is high and the consequences significant-a decision not to repudiate may be considered.
Conversely- a party who has expended money in reliance on a promise from another to do something should take advice on possible action to recover such monies.
Complex questions of law can affect the outcome of any contemplated action.
If you have any questions about the matters raised in this article please contact us.
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